–Bank Tests Likely Hot Topic At ECB Press Conference Thursday

BRUSSELS (MNI) – Details of the stress-testing of EU banks,
designed to shore up market confidence, Thursday left investors hungry
for more, guaranteeing the topic a lot of air time at the European
Central Bank’s monthly press conference later.

The objective of the tests – which examine how different financial
institutions would react to a variety of economic scenarios – is to
reassure the markets that Europe’s banks are healthy and don’t pose a
threat to the 27-country bloc’s economic recovery.

Late Wednesday the London-based Committee of European Banking
Supervisors – which is coordinating the testing – released details of
the methodology being used and named the ninety-one participants, which
it said account for 65% of all EU banking assets.

But some say more details will be needed to reassure the markets
that the tests are stringent enough and not just a public relations
exercise.

Specifically, investors want extra details on how sovereign bonds
from different countries will be treated differently in the testing
process and information on liquidity and funding stress tests, which
weren’t mentioned in Wednesday’s CEBS announcement.

“Overall, we think the report should be well received by the
markets as it eliminates some of the uncertainty around the coverage and
type of scenarios,” Antonio Garcia Pascual, an economist at Barclays
Capital said.

“However, it may be somewhat disappointing for those who were
expecting specific details on haircuts and treatment of
country-by-country sovereign bonds,” he added.

The stress-test’s “adverse scenario” assumes that the EU economy
underperforms the European Commission’s forecasts by 3 percentage points
over the 2-year “horizon” period, CEBS said.

The Commission is forecasting growth of 1.0% this year and 1.7%
next year. It does not yet provide a forecast for growth in 2012.

But it was the sovereign debt element of the tests which
disappointed investors, who worry turmoil caused by concerns about debt
and deficit levels in some European countries hasn’t been accurately
priced in to the test scenarios.

“The sovereign risk shock in the EU represents a deterioration of
market conditions as compared to the situation observed in early May
2010,” the CEBS said in its statement.

But that doesn’t seem to satisfy the markets, who want to know how
big a deterioration in market conditions is being priced in and how
that would vary across markets in different countries.

“One obvious shortfall of the information we have so far is the
lack of detail on the sovereign debt element of the testing,” BNP
Paribas economist Ken Wattret said.

“The general impression is that the assumptions of this part of the
test will be too conservative. Moreover, reading between the lines, the
lack of information available at this point suggests that national
governments are still struggling to reach agreement over the specific
details of the exercise. This is not a good sign,” Wattret added.

And lack of details from CEBS means European Central Bank President
Jean-Claude Trichet will face a barrage of questions from reporters at
the ECB’s monthly press conference later Thursday.

“The CEBS statement suggests that the stress test will remain fuzzy
regarding the risks on banks related to sovereign bonds, currently the
main market concern,” said Giada Giani, an economist at Citi.

“In our view a major hurdle for a severe stress test on banks
remains the lack of a backup solution for banks that would require
additional capital in order to cope with such stress,” Giani added.

The results of the tests will be released July 23, CEBS confirmed.

–Brussels: 0032 487 (0) 32 803 665, echarlton@marketnews.com

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